Your Tax Questions On Refinancing Loan Security Answered
Q: REFINANCING AND LOAN SECURITY
We are currently researching refinancing options for an investment property and owner-occupied property.
We have an interest-only investment loan (for full purchase price plus borrowing costs). We also have a variable, principal and interest home loan. The owner-occupied property has been used to crosscollateralise both loans.
We have been told that having the two properties ‘stand-alone’ is a better proposition in the long run and so a mortgage broker has suggested borrowing 80% LVR using our investment property as security, and then borrowing the shortfall with another investment loan that is secured against our owner-occupied property, as well as a separate variable owner-occupied loan with offset.
A: Ultimately, it does not matter which property is used as security for your loans – whether they are cross-collateralised, stand-alone or a mix of both. For example, you can use your owneroccupied home as security for an investment property loan and vice versa. The test is what the purpose of the loan is for, and if the loan is used to purchase an investment property for income-producing purposes then the interest on the loan is tax-deductible irrespective of what security is used for the loan.
Another example is that when you increase your investment loan for private purposes (such as a holiday or renovations to your owner-occupied home) then you are unable to claim that additional top up of that investment loan for income tax purposes. It is the purpose of the loan that determines the tax deductibility of the interest.
Also, if you are refinancing your loans with mixed purposes (that is, your loans may be part private and part investment) then you must keep proper records and only claim the portion of the interest that is only for investment purposes as income tax deductions.
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